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March 30, 2012

Tim Guinness: China, Energy and Really Good Beer—Weekend Interview

Arguments in favor of the energy sector and a surprising take on China mark our conversation with a descendant of alcohol aristocracy

The legendary eccentricity of certain members of the Guinness clan—gleefully reported by Vanity Fair, W Magazine and other “society” mags—is almost as popular as the brew that bears their name.

As a direct descendent of Sir Arthur Guinness, you would think Tim Guinness would be one of them; you’d be wrong. He is most decidedly a sober money manager (we like our puns) who’s all business, but not above a good laugh. Sure, his family name might open a few doors to the right people, probably in the hopes he’ll show with a barrel of the black gold (we don’t mean oil), but that’s about the extent of his name recognition, and his industry acumen must then take over.

CIO and portfolio manager Guinness (left) joins CEO Jim Atkinson and investment director Edmund Harriss at the helm of Guinness Atkinson Funds, a shop with heavy sector plays in both energy and China, two areas of which advisors may have heard.

“I count myself lucky. The company I was running years ago was taken over, and I was very upset, because I didn’t have an opportunity to realize the vision I had laid out,” Guinness says. “A few years later we started this firm, which was a great thing. I can have more control because I own more of it. So I could start over on that path to realizing my vision.”

And vision he has; once he gets going it’s hard to interject as his enthusiasm and ideas flow freely.

The two main “pillars” of the firm are Asia excluding Japan (with a large focus on China) and energy. He adds a third, smaller pillar of innovation and technology.

“These three pillars are everything that interests me,” he says. “I am an engineer and went to MIT, but I’m also very interested in economics and the geopolitical scene, so all of these play to my strengths. We specialize in a way that means we want to be the next Dodge & Cox (although I use that loosely) in order to grab the investing public’s attention.”

Beginning with the energy sector, stocks are now valued at around $70 and should be upwards of $100, Guinness says, meaning they’re undervalued anywhere from 30% to 50%. He believes the right price for oil is between $80 and $100. He predicts that at the end of the decade the price will be between $150 and $200 a barrel; about $120 in today’s dollars with the rest of its price appreciation coming from inflation.

In natural gas, he points to important developments in the area of exploration.“Horizontal drilling is one, combined with fantastic innovation in the ability to control the location of the drill bit itself,” Guinness says. “And of course fracking is adding a whole new dimension to the industry. All of these things have brought marginal costs down for natural gas companies. The industry was until recently a ‘sunset’ industry in the United States, but with these innovations, it’s very much in a ‘sunrise’ stage, one in which I see at least 50 years of light.”

Sure, natural gas has experienced a bit of a glut in recent years, but Guinness notes the number of drilling rigs in the United States has dropped from 1,000 to about 670. He feels it might have to shrink further to about 500 rigs in order to fully compensate for the glut.

“There’s been an interesting demand response as well, as the country has switched from coal to gas in its electricity fleet. And chemical plants will now be using gas for their feed stock.”

Down the road, he sees further market share growth for natural gas as a transportation fuel.

“Natural gas has had a rough go lately, but it will work itself out eventually,” he concludes. “It will be a growth business.”

Moving on to China, he says he’s a “believer,” having first visited the country in 1990.

“The Shanghai stock exchange had just reopened, which surprised me because it was—and still is—a communist country. But they were doing everything to get their economy moving. After 300 years of falling behind the west, they were determined to be on par with other OECD nations.”

The growth numbers Guinness rattles off are impressive:

In 2003, car ownership in China was roughly where the United States was in 1920. By 2020, China will overtake the United States, when each country will have roughly 290 million cars on the road.

The United States' yearly oil consumption averages 25 barrels per head, while China averages 2.5 barrels per head. The China figure will double to 5 barrels per head by 2020, moving from 10 million barrels per day to 20 million barrels.

China consumes two to three times the amount of coal when compared to the United States, but only about half of the amount of oil and only one-sixth the amount of natural gas. The amount of coal use will flatten, oil with increase with a corresponding increase in the number of cars and the amount of amount of natural gas will increase 10-fold.

“All of this illustrates the fantastic catch-up that is going on in China, and it will continue for 20 years,” he says.

When asked if he is at all concerned about the politics and human rights violations often cited by China’s critics, his answer is direct, reflecting his style.

“China is the best-run country in the world. I know that’s not often heard as an answer to that type of question, but most people on the Politburo have shown themselves to be incredibly competent. They’ve each run individual provinces, and each is about the size of small countries in and of themselves.”

Treading further, he claims China’s system is better than true democracy because of the competency and managerial skills Chinese leaders display, while conversely noting the lack of continuity that results from elections held in the United States every four years.

Yet he acknowledges it’s worse than democracy in that the Chinese government is not as initially responsive to the will of its people as that of the United States, but becomes more responsive as time goes by.

“I believe the perception of corruption on the part of the Chinese government is overblown. I don't worry about it, and I don’t think other people should either.”